Home Equity Loan Interest Still Tax Deductible
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Unless you have an exceptionally large HELOC or home equity loan, the interest paid on it is unlikely to be the deciding factor in taking the standard deduction or itemizing deductions. If you are already itemizing your deductions, then choosing a HELOC or a home equity loan over something like a personal loan so that you can deduct the interest may make the most financial sense for you. Keep in mind that the attractiveness of a HELOC—and its deductibility—can change if interest rates rise.
According to the IRS, interest on home equity loans and lines of credit are deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan. The IRS allows you to fully deduct mortgage interest paid on a total acquisition debt of up to $1 million, or $500,000 if you are married filing separately. As long as your first-second combination mortgage arrangement is within these dollar limits, you can deduct all of the interest that you pay on both the first mortgage and on the HELOC. Also, worth noting is the new tax plan lowers the dollar limits on traditional mortgages.
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Another thing to be aware of is the fact that the $750,000 limit applies to the combined total of all debt, on all properties, owned. For example, if you have a $500,000 mortgage on your primary residence and owe $250,000 on a home in Palm Springs the entire amount gets a tax break. But if your primary residence is $750,000 and your secondary home is $250,000, you would only get a tax break on $750,000 and none of your paid interest on the second home would be deductible.
You can deduct the interest on up to $750,000 in home loan debts if the loans were made after Dec. 15, 2017. If your total mortgage debt is higher than that, then you wont be able to deduct all of the combined interest paid. The $1 million cap applies for mortgages obtained before that date. Taking out a home equity loan or a HELOC just to deduct the interest on your taxes was never the best decision, and tax changes make it even less practical. Taking out a home equity line of credit may still be worth it even if the interest is not deductible to you, depending on how you plan to use the money. If you’re interested in consolidating credit card debt, for example, and if you can get a much lower rate with a HELOC, then you could save money this way.
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However, if you’re self-employed or retired, lenders may require a copy of your return to verify your income. Getting a HELOC when one is available also makes more cash accessible in an emergency. Again, interest on a HELOC only applies when homeowners use the money, so the cost of getting one is relatively low. Therefore, it can be a good move to get one if you think that you might lose your job. If you wait until after a job loss, then you might not have sufficiently good credit to get a HELOC. Furthermore, banks can raise credit standards for HELOCs when an economic downturn occurs.
You can only deduct interest on up to $750,000 in mortgage debt, including your first mortgage and any home equity loans or lines of credit. The limit is half that ($375,000) for married couples filing separate returns. After the 2017 tax year, interest on home equity debt for purposes other than the "buy, build, or substantially improve" standard is no longer be deductible.
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While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. If you fall behind on your payments, you could end up in foreclosure. So before taking on any home equity debt — for any purpose, tax-deductible or not — consider when you can afford to make the payments.
If youre interested in consolidating credit card debt, for example, and if you can get a much lower rate with a HELOC, then you could save money this way. Of course, this strategy assumes that youll pay the HELOC down as quickly as possible to minimize interest charges and that you wont run up new debt on the cards that youve paid off. So, you could use a home equity loan to refinance credit card debt or pay for a wedding, and it was all deductible as long as you stayed under the $100,000 home equity debt cap. Itemizing deductions allows some taxpayers to reduce their taxable income, and thus their taxes, by more than if they used the standard deduction. Using a HELOC to invest in home improvements to your primary residence could be a smart choice if those improvements increase the home’s value and you can deduct the interest payments.
Paying off your credit card or student loans with a HELOC may still be a smart financial move, but it won’t give you a tax break. For example, if a homeowner uses an existing home equity loan or home equity line of credit or takes out a new one to pay student debt, buy a car or reduce credit card balances the interest isn’t deductible. Prior to the Tax Cuts and Jobs Act of 2017, homeowners could claim a plethora of extra tax deductions. After the TCJA became law, it’s more complicated to get a deduction when you borrow against your home’s equity—but it’s still possible if you meet certain criteria. HELOC interest is tax deductible only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan.
The same goes if you are taking out a loan and letting the money sit in the bank as your emergency fund. Whats more, the renovations have to be made on the property on which you are taking out the home equity loan. You cannot, for example, take out a loan on your primary residence and use the money to renovate your cottage at the lake. For qualifying years, the loan must be secured by the taxpayer’s main home or second home , not exceed the cost of the home and meet other requirements. The standard deduction in 2022 is $12,950 for single filers and $25,900 for couples who are married and filing jointly (rising to $13,850 and $27,700 in 2023). Home equity loans and lines of credit were originally designed to help property owners renovate and expand their homes.
Earlier proposals of the tax plan would have completely eliminated this deduction. Thankfully, that didn’t happen but the final plan did put quite a few limitations on this deduction for property owners. This includes both the primary mortgage, and home equity loans … Tax Deductible!
Interest on home equity debt is tax deductible if you use the funds for renovations to your homethe phrase is buy, build, or substantially improve. Whats more, you must spend the money on the property in which the equity is the source of the loan. If you meet the conditions, then interest is deductible on a loan of up to $750,000 . Lenders set their HELOC rates based on something called the prime rate, which is what banks and other financial institutions use for creditworthy borrowers taking out loans and lines of credit. The prime rate is in turn based on the federal funds rate, which is set by the Federal Reserve.
When in doubt, be sure to consult an accountant to help you navigate the new tax rules. CU SoCal does not provide and is not responsible for the product, service or overall website content available at these sites. The privacy policies of CU SoCal do not apply to linked websites and you should consult the privacy disclosures on these sites for further information. However, each individual’s situation is unique and you should speak with your tax preparer or a tax professional about your filing options. Let’s say you paid $2,000 in interest on a HELOC and $10,000 in interest on your mortgage in 2021. The mortgage is a secured debt on a qualified home in which you have an ownership interest.
Peggy James is a CPA with over 9 years of experience in accounting and finance, including corporate, nonprofit, and personal finance environments. She most recently worked at Duke University and is the owner of Peggy James, CPA, PLLC, serving small businesses, nonprofits, solopreneurs, freelancers, and individuals. You are leaving AARP.org and going to the website of our trusted provider. If you own your home, you probably have noticed that real estate prices have climbed significantly in the last year. For some homeowners, they may be enjoying 25% or more of home price increases since the pandemic started. Here’s how that works with a home valued at $400,000 with a loan balance of $300,000.
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